web analytics

Spark copper tax pie chart

Spark’s pie chart tells the story: Half the money a customer pays for broadband goes to Chorus.

It’s a simple way of sending a powerful message.

And it’s timely.

The Commerce Commission will soon decide how much Chorus can charge to connect a line to the copper phone network. The price could rise and in turn push up the cost of broadband connections.

Going public puts pressure on the Commerce Commission and the government to reconsider the copper line price.

Background

Why is this necessary? Some background helps.

Telecom NZ demerged so it could win the lion’s share of contracts to build the UFB fibre network. It became what we now call Spark and Chorus.

Spark is a retail company selling phone and data services. Chorus took on the job of building New Zealand’s government-mandated UFB fibre network.

The copper phone network is a Chorus monopoly. It is also Chorus’s main source of revenue until the fibre network is complete. Spark and other ISPs have to pay Chorus a fixed monthly fee for every customer using it.

Because it’s a monopoly, the Commerce Commission regulates the copper phone line price.

At the time of the demerger the industry assumed the copper line price would drop following a Commerce Commission investigation.

The price did drop.

However, the first draft of the price drop spooked Chorus and its investors. It then called for a fuller investigation.

Tough negotiation on fibre network

Chorus was spooked because the government drove a hard bargain when it awarded the UFB contracts. In hindsight the bargain was too hard[1].

This squeezed Chorus between the hefty capital costs of network building and a regulated price cut.

While the Commerce Commission is supposed to be independent there’s suspicion in the telecommunications industry the government, or someone in the government, leaned on the Commission to help repair Chorus’ financial position.

Late last year the Commission surprised everyone in the industry expecting a large copper price cut by coming back from the fuller investigation and announcing a small than expected cut. In effect this was a price rise.

Benchmarked

In theory this decision was made after examining the cost of providing a line and is benchmarked against what happens overseas. Maybe.

Comparing wholesale broadband charges

 

As Spark New Zealand Managing Director Simon Moutter says in a press statement:

“The proposed Chorus charges are almost 80 percent higher per line than the median charge of comparable countries – that’s up to $180 more per year. We think that’s not on and that Chorus charges should actually be reduced.”

Spark set up a website www.becounted.org.nz to press its case. There’s information and encouragement for customers to send a submission to the Commerce Commission “asking them not to increase the Chorus monopoly charges for broadband”.

Spark has friends

Although this campaign is a Spark initiative, I understand other service providers are supportive. Tuanz and InternetNZ have both spoken positively about the campaign.

InternetNZ CEO Jordan Carter says:

“If the Commerce Commission wants to take that approach, it needs to make a clear and compelling case for why New Zealanders should pay more. At every stage of its regulatory process so far, it has been pushing prices up — in a way that isn’t supported by the evidence shared in submissions.”

This puts the government in a tricky spot

The most likely outcome is that we’ll end up with a higher regulated copper access price because that is still politically expedient.

By the way, you’ll notice you haven’t heard the term copper tax recently. That’s because the government warned industry organisations and players to lay off the clever rhetoric or face dire consequences.

Speaking of bullying: no-one is ever going to admit that someone leant on the Commerce Commission to deliver a price that gets Chorus out of the hole dug during the UFB negotiation.

And there’s little chance of the government turning around and finding an extra pool of money to compensate Chorus or to otherwise fix matters[2].

Apart from anything else, this is inherently unfair on those customers outside the 80 percent of the country that will get fibre. In effect the rural have-nots who have no alternative to copper phone lines will end up subsidising the urban haves who will get fibre.

We’ll all have to go on pretending that the system just works. Unless someone with deep pockets decides to call in the lawyers.

Meanwhile New Zealanders will pay high fees for broadband from service providers who barely scrape a living.


  1. Compare the NZ$1.5 billion cost to the taxpayer for New Zealand’s urban fibre network against the original A$40 billion cost of Australia’s NBN. Even when you adjust for market size and the smaller scope of UFB, the comparable price would be closer to NZ$6 billion.  ↩
  2. Even though that is clearly the only sensible way out of this mess. It’s time the government came clean and admitted it isn’t paying Chorus enough to build the network, that’s what happens all the time with other infrastructure projects.  ↩

Ovum’s Australia-based research director David Kennedy says if New Zealand’s government is serious about making Ultrafast Broadband work, it must name a date to close the copper network.

Kennedy says:

“Tensions in the New Zealand telecommunications policy framework will persist as long as New Zealand has two access networks, FTTN and UFB, operating in parallel.

He links this to the copper network access price issue that has caused so many problems for Chorus and by extension the government:

Apart from the pricing problems, New Zealand telecommunications would operate much more efficiently if demand were consolidated onto one fixed access network. Policy currently envisages a gradual, organic migration to fibre, but at some point the FTTN network must be shut down in the UFB footprint.”

Kennedy is based in Australia. His proposal is similar to the heavy-handed approach Australia’s government originally aimed to take with its NBN fibre project.

That line of reasoning says giving consumers choice is an indulgent luxury. Kennedy appears to agree:

“If the Government remains committed to the UFB program, then migration should not be left to chance. A migration timetable, with scheduled shutdown of FTTN where UFB is established after a reasonable transition period, is the logical extension of the government’s commitment to UFB.”

Kennedy also sees closing the copper network as a way to get around the financial problems facing Chorus. He says:

“The regulator’s recent pricing decisions significantly affect Chorus’ revenue base and investment capacity after 2014, and will also make fibre relatively unattractive to end users.

We’ve heard this argument before. The rationale is that pushing the wholesale price of a copper connection significantly below the price of a fibre connection means customers will be more inclined to choose the cheaper option.

Kennedy takes it a step further. He says the regulated copper price also makes delivering copper connections relatively more attractive to retail ISPs.

He says:

“Chorus and the other UFB investors are structurally separated and so are dependent on these ISPs to promote fibre to end-users. The ISPs now have less incentive to do so.